Strange justice

Dec 26, 2005

In the last few weeks, Indian courts and appellate tribunals have strangely allowed dubious industrialists to fight proxy battles against regulatory orders in India although they have Interpol red corner notices against them and conveniently remain outside the country and the jurisdiction of our courts. These scam-accused seem to have no problem hiring and paying top lawyers in India to fight long legal battles without so much as setting foot in the country. Last week, Dinesh Dalmia’s DSQ Software lost an appeal before the Securities Appellate Tribunal (SAT) even as the New York Post has been filing a series of reports about his activities. Companies allegedly owned by Dalmia have filed for bankruptcy in the US after failing to repay $83 million raised abroad through BPO companies. Yet, the Central Bureau of Investigation (CBI), which has an Interpol alert against him, made no effort to seek his personal appearance during the hearings. Last week, SAT heard another appeal against a Securities and Exchange Board of India (Sebi) order by yet another scam-accused who has an Interpol red corner notice against him and whose passport was impounded on September 22 this year. Again, the CBI remains a mute spectator. However, the Finance Ministry seems to have turned on the heat and is pushing somnolent investigators to pursue the key figures of the 2000 scam such as Ketan Parekh.

Fund Watch

Now that Sebi has mandated margin payments by institutional investors seeking to subscribe to Initial Public Offerings (IPOs), the action has drastically cut over-subscription numbers, especially in the retail segment. At the same time, market watchers point to the strange phenomenon of large mutual funds paying a higher price to buy shares through bulk deals in the secondary market (often on the very day that the share is listed) rather than subscribe to IPOs. A list of such bulk deals is openly available on websites of both national bourses. Market sources offer several explanations for this trend. First, funds who do not want to pay margin on application money are forced to buy shares more expensively in the secondary market. They often ask foreign brokerage firms to apply on their behalf and the shares are flipped on listing to the ultimate buyer; the secondary market purchase price is higher because it includes financing costs and a profit for the brokerage firm. This still does not explain why some Fund Managers are investing in dubious IPOs at a premium to the already high issue price. Sources attribute this to simple collusion between brokers and Fund Managers and suggest an investigation by Sebi as well as compliance officials of such Funds. There is a third, more complex explanation. It is that dubious industrialists, deliberately price their IPOs at a huge premium and ‘‘arrange’’ for subscription through financiers. Once the issue is ‘‘oversubscribed,’’ it attracts the retail investors and Mutual Funds who think they missed a profit opportunity. The ‘‘financed subscriptions’’ are then unloaded in the secondary market after first ramping the price through circular trading.

Rating IPOs

The most glaring example of collusion for financing subscriptions is probably one shady IPO that was barely subscribed last fortnight, but is having a glorious post listing run with several mutual funds buying shares in bulk on the secondary market. This company had raised money through two IPOs during the notorious vanishing company period of 1992-94. It has since merged, reverse merged and renamed these companies, restructured and reduced capital — all to the disadvantage of public shareholders and to the advantage of the promoter family. A series of similar IPOs are lining up to pick investors’ pockets in the coming months. Add to this the revelations from Sebi’s own investigation into what is being called the ‘‘Demat Scam’’ and genuine investors are seriously worried. The Yes Bank IPO investigation exposed brazen misuse of market infrastucture in order to make multiple applications through thousands of demat accounts. It also indicates collusion between registrars, bankers and scamsters and suggests that the Yes Bank case maybe just a tip of the proverbial iceberg. These developments have raised questions about the quality of public issues, their pricing and the promoters’ track record; consequently investor associations have renewed their demand for an independent rating of IPOs.

Tailpiece: Nationalised banks may have gone public, but they still find it difficult to accept that ordinary investors are on par with the first citizen of India, who holds their shares on behalf of the Indian Government. Prof Anil Agashe says, ‘‘While going through the Annual Report of Syndicate Bank, I noticed that the auditor’s report is addressed to the President of India. What about other shareholders? Is there something in the Banks Nationalisation act? I think this is unfair and the report should be for all the shareholders’’. Is this corporate governance PSU style? Or are old habits hard to change?